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Viacom Can Only Go So Far on Its Own

(Bloomberg Opinion) -- Against the odds, Bob Bakish pulled Viacom Inc. out of its darkest days, put a halt to the obituaries being drafted for the company and gave it new life. But this may be about as far as Viacom can go on its own. It’s time to make a deal with CBS Corp.

The parent of MTV and Nickelodeon posted first-quarter results on Tuesday morning that showed mixed progress in its turnaround efforts and the difficulty of being a small fry in the media world. Profit, aided by improvements at the Paramount Pictures film studio, surpassed analysts’ expectations. Still, revenue fell short, as cord-cutting continued to weaken advertising sales, a trend that’s unlikely to reverse.

It must be frustrating for Viacom that any time its team’s hard work is mentioned, it’s in the same breath as CBS. Under Bakish, Viacom has spent more than two grueling years cleaning house, restoring morale, reducing debt and trying to give viewers a reason to watch its TV networks again. It’s done a decent job, considering industry-wide challenges amid the distractions of drama-filled on-again, off-again merger discussions with CBS and the recent spotlight on the alleged sexual transgressions of former longtime CBS CEO Les Moonves.

Viacom’s numerous niche networks have an obvious disadvantage in a marketplace shifting toward skinnier TV bundles that generate much narrower profit margins than traditional cable packages. The popularity of live-TV streaming services such as DirecTV Now and Sling TV, which have packed in as many channels as possible, were seen as a saving grace. But AT&T Inc.’s own earnings report last week showed that DirecTV Now has lost thousands of customers after raising its unsustainably low monthly subscription fee, so that doesn’t bode well for Viacom. And now with Walt Disney Co. and AT&T itself on the verge of launching new video products to exclusively showcase their own content, the road ahead looks tougher for smaller players.

Recombining with CBS would help both companies save significant sums in overhead costs and perhaps lead to the necessary pruning of Viacom’s overly large portfolio of TV networks. Think about it: Were Viacom today made up of mainly MTV and the Paramount film and TV-production studios, the business wouldn’t look half bad. It recently acquired Pluto TV, a free, advertising-supported streaming service, in a $340 million deal that gives Viacom an affordable entry into the direct-to-consumer video market.

There’s speculation that a CBS-Viacom deal could include a third component, such as a tie-up with Discovery Inc., which is in a similar boat. But putting CBS and Viacom together is a feat in itself, so I would imagine any other complex features would come later on. And as for the concern that CBS may opt for Discovery or another target entirely, that seems unlikely given that Shari Redstone, the 64-year-old de facto controlling shareholder of both CBS and Viacom, seems to be seeking to tidy up her family’s holdings for an eventual exit. Plus, as CBS looks for a permanent CEO, Viacom’s Bakish, 55, looks to be an obvious candidate. Should they go with anyone else, it could complicate the potential merger once again. (Recall that Moonves, the now disgraced former CBS CEO, had wanted his No. 2, Joe Ianniello, to take a prominent role in the combined company, which conflicted with Redstone’s and Viacom’s plans.)

Bakish has done a commendable job with Viacom, but there’s only so much upside for a small media company in a land of giants chasing a shrinking audience.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.